CFPB’s challenge in identifying ‘consumer harm’

Suggesting the Consumer Financial Protection Bureau (CFPB) could better serve U.S. taxpayers by doing so, Rep. Blaine Luetkeyemer (R-Mo.) urged CFPB Director Kathy Kraninger to dismiss any pending enforcement actions in which consumer harm has not been identified during her recent hearing before the House Financial Services Committee.

The suggestion was presented in a straightforward, matter-of-fact manner that suggested the CFPB could make better use of its resources, as could many of the companies at the center of such cases.

“The CFPB needs to protect consumers and be good stewards of the taxpayers and not tie up businesses with unnecessary litigation for years to come,” Luetkemeyer said during the hearing.

Kraninger told Luetkemeyer that she is in the process of reviewing all ongoing matters and getting various viewpoints from staffers and the companies involved.

“We’re looking at the issues, and making the best use of our resources to protect consumers is a focus,” Kraninger said. She also noted that the bureau plans to increase its focus on preventing consumer harm going forward.

The fundamental problem with Luetkemeyer’s suggestion, former CFPB attorney and managing partner at Garris Horn PLLC Richard Horn told Dodd Frank Update, is that, as simple as it sounds, the reality of identifying whether consumer harm has occurred is anything but simple for the CFPB.

In addition to the most obvious types of consumer harm – in which a consumer loses money because they are directed to pay too much for a product or service or never receives what they paid for – there are other types of harm that the CFPB may identify, Horn explained. For example, he noted that consumer harm could take the form of a denied loan application based on discrimination or another unfair practice, where no money exchanges hands.

“What’s the harm and proper restitution in that situation? Is the CFPB going to require cash payments to consumers who were denied loans? What if consumers received an equal or better loan from another lender?” Horn asked, rhetorically. “These are the types of things that the CFPB would have to consider if the threshold for bringing a supervisory or enforcement action is consumer harm.”

One of the statutes that best highlights the bureau’s challenge in determining when consumer harm has occurred is the Real Estate Settlement Procedures Act (RESPA), Horn said. Particularly, what the issues connected with RESPA exemplify are those pertaining to how economic developments can disrupt the financial marketplace in a way that causes consumer harm.

“You could have a whole slew of Section 8 violations that don’t directly result in consumer harm,” Horn explained. “If a consumer is referred to a particular provider and they get the settlement service that they paid for, it is not necessarily easy to see what the direct consumer harm is there. But there is an underlying view that Section 8 violations disrupt the marketplace, generally resulting in increased costs for consumers. That is the harm Congress was trying to address with RESPA. That general harm that you wouldn’t be able to see in a particular transaction could fall under such a ‘consumer harm’ threshold if the CFPB considered only direct consumer harm.”

Horn also referenced the case of Spokeo, Inc. v. Robins, which originated in 2010 and saw its last ruling approximately seven years later, as possibly informing a CFPB “consumer harm” threshold. The Supreme Court ruled in 2016 that for a consumer, claiming that Spokeo violated the Fair Credit Reporting Act (FCRA) by publishing misinformation about the individual, to have standing to sue, he must demonstrate that he suffered a specific, concrete harm from an alleged statutory violation. The Supreme Court remanded to the Ninth Circuit to determine if the plaintiff, which ruled in August 2017 that the mere placement of incorrect information about a person in a consumer database constitutes a concrete injury and an FCRA violation. Spokeo appealed the Ninth Circuit’s decision to the Supreme Court, but the Supreme Court denied the petition without comment.

Examiners also face a challenge when marketing materials contain inaccurate or misleading information because, although no money exchanges hands in such instances, there is a chance that the deceptive marketing material could influence a consumer’s financial decisions.

When it comes to alleviating confusion over when harm has occurred, Horn said that guidance may not be the answer, because each determination would be highly dependent on the particular facts and whether the required elements of a violation include consumer harm. Instead he said it would be a better use of the bureau’s time to follow through on acting director Mick Mulvaney’s statement that the bureau would issue a rulemaking on the “abusive” prong of its UDAAP authority under the Dodd-Frank Act, or provide more guidance in other areas of regulatory uncertainty.

“I think everybody already assumes that consumer harm really depends largely on the facts and circumstances surrounding each issue. This would make it really hard to come up with a standardized definition for such a ‘consumer harm’ threshold,” Horn said.

If the bureau were to provide guidance on this issue, Horn added that one area where the bureau could do well to beef up guidance is in reference to voluntary restitution in its bulletin on “Responsible Conduct.”

“Perhaps, in the context of that bulletin, guidance on what types of consumer harms companies should consider offering voluntary restitution for, or what amounts they should consider would be useful,” Horn said. “There could be a need for more clarity on what the CFPB expects in terms of restitution. But you could also have a lot of cases where there is a technical violation and it didn’t result in any consumers paying more money than they should have, or any money exchanging hands between the consumer and the company.”

He also offered his thoughts on the Kraninger’s statement that the bureau intends to ramp up its focus on preventing consumer harm, asserting that doing so likely could best be accomplished through a corresponding increase in supervisory activity. Find out more about that in an upcoming article for Dodd Frank Update.

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The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have issued information on the host state loan-to-deposit ratios, which are used to determine compliance under Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Review the ratios in Dodd Frank Update’s Library.